**4.4 Hypotheses test**

**Table 5** presents the regression results examining the study hypotheses based on the two-step system-GMM. Based on **Table 5**, the diagnostic tests show that the two models (1 & 2) are well fitted as AR(1) and AR(2) satisfy the conditions that there is first-order autocorrelation but no second-order, as suggested by the literature [32]. **Table 5** also depicts that the models (1 & 2) are well fitted with statistically significant test statistics for the Wald test, indicating that the instruments are valid in the GMM estimation for the measurements (ROA, ROE) (Model 1: *p* = 0.00, 0.00; Model 2: *p* = 0.00, 0.00).

Additionally, the Hansen *J*-statistic test does not reject the null hypothesis at any conventional level of significance for the two measurements (ROA, ROE) (Model 1: *p* = 0.59, 0.59; Model 2: *p* = 0.70, 0.35), indicating that all the models have valid instrumentation. Finally, in line with the rule of thumb [41], the number of instruments does not outnumber the number of groups in all the models.

As expected in the first hypothesis (H1), SSB score is reported to relate positively to performance as measured by ROA and ROE (Model 1: at *p* = 0.05, 0.01); thus, the first hypothesis is supported. This result is in support of literature such as Nomran and Haron [27] who found a positive impact for the SSB score on the performance of Southeast Asia IBs.

For the second hypothesis (H2), a positive relationship is found between the SSB score and performance in the presence of the financial crisis for all the measurements (ROA, ROE) (all at *p* = 0.05); the second hypothesis is, thus, supported but not at 1% level of significance. This result is consistent with the findings of [15], who found a positive and significant impact for SSB supervision on the IBs' performance during the financial crisis. The results indicate that SSBs slightly enhance IBs' performance during the financial crisis period. According to Mollah et al. [15], a possible justification for this positive effect is related to the SG structure of IBs that helps them undertake higher risks and decrease the effect of the crisis on their profitability. Ben Zeineb and Mensi [42] also found that the governance structure of IBs allows them to take higher risks to achieve a high efficiency level. Abedifar et al. [43] believe that components of IBs' governance systems may protect them from the problems faced by CBs.

The findings, therefore, suggest that an increase in SSB effectiveness increases IBs' performance even during the crisis periods. For this, the IBs, policymakers and practitioners should consider these findings when aiming to improve SG practices in the Islamic banking industry, which in turn may help in protecting IBs during crisis and non-crisis periods. They should give due importance to SSB characteristics (size, cross-membership, educational qualification, reputation and expertise) in enhancing the performance of IBs. Regarding the appropriate SG structure, some empirical studies have been conducted in this context. Nomran and Haron [2] suggested that SSB size of IBs should neither be lesser than three nor greater than six. Further, Nomran and Haron [27] confirmed that IBs should balance the number of SSB scholars with experience in *Shari'ah*, as well as in law, accounting and finance. They also indicated that scholars with PhD in *Shari'ah* and law are more associated to enhance IBs' performance. Finally, they indicated that IBs should

*SSB and IBs' performance in the presence of the financial crisis: two-step system-GMM estimation.*

*ROA = return on assets; ROE = return on equity; SSB-SCORE =* Shari'ah *supervision score, BSIZE = bank size, BAGE = bank age, GDP = gross domestic product, INFLATION = inflation rate. Model (1): Shows Eq. (1); Model (2):*

*Shows Eq. (2). Stata software was used for analyzing hypothesis test based on System-GMM.*

**Model (1) (2)**

*Relevance of* Shari'ah *Governance in Driving Performance of Islamic…*

*DOI: http://dx.doi.org/10.5772/intechopen.92368*

SSB-SCORE CRISIS

Wald test (*p*-value) χ2 statistic

Hansen test (*p*-value)

No. of observations

*parentheses).*

**Table 5.**

**45**

**Variables ROA ROE ROA ROE** Constant 10.256**\*\*\*** [0.000] 67.202**\*\*\*** [0.000] 5.346 [0.191] 36.405**\*\*** [0.014] ROA (1) 0.343**\*\*\*** [0.000] — 0.404**\*\*\*** [0.000] — ROE (1) — 0.384**\*\*\*** [0.000] — 0.396**\*\*** [0.017] SSB-SCORE 1.156**\*\*** [0.025] 6.947**\*\*\*** [0.003] 0.875**\*\*** [0.026] 4.420**\*** [0.072]

BSIZE 0.927**\*\*\*** [0.000] 6.738**\*\*\*** [0.000] 0.432 [0.423] 3.157 [0.282] BAGE 0.465 [0.117] 1.331 [0.537] 0.160 [0.798] 2.085 [0.656] GDP 0.114 [0.223] 0.213 [0.654] 0.128 [0.281] 0.267 [0.775] INFLATION 0.160**\*\*\*** [0.001] 1.268**\*\*\*** [0.000] 0.081 [0.226] 1.010**\*\*\*** [0.004] CRISIS — — 19.974**\*** [0.060] 105.700**\*\*** [0.044]

AR(1) (*p*-value) 1.760**\*** (0.079) 1.750**\*** (0.079) 1.770**\*** (0.078) 1.720**\*** (0.086) AR(2) (*p*-value) 1.050 (0.292) 1.520 (0.128) 1.110 (0.266) 1.510 (0.130) No. of instruments 24 25 27 17 No. of groups 62 62 62 62

VIF VIF VIF VIF VIF SSB-SCORE 1.21 1.20 1.43 1.44 BSIZE 1.06 1.05 1.07 1.06 BAGE 1.08 1.07 1.10 1.10 GDP 1.03 1.02 1.04 1.02 INFLATION 1.25 1.25 1.27 1.26 *The GMM model includes one lag of the dependent variables. Standard coefficients are presented (*p*-values in*

— — 5.070**\*\*** [0.049] 30.528**\*\*** [0.031]

781.260**\*\*\*** (0.000) 155.370**\*\*\*** (0.000) 259.690**\*\*\*** (0.000) 119.410**\*\*\*** (0.000)

15.000 (0.595) 16.020 (0.591) 14.420 (0.701) 8.910 (0.350)

263 278 264 277

restrict the scholars' memberships across SSBs.

*\*\*\*, \*\* and \* are the* p*-values significant at 1, 5, and 10%, respectively.*


*Relevance of* Shari'ah *Governance in Driving Performance of Islamic… DOI: http://dx.doi.org/10.5772/intechopen.92368*

*The GMM model includes one lag of the dependent variables. Standard coefficients are presented (*p*-values in parentheses).*

*\*\*\*, \*\* and \* are the* p*-values significant at 1, 5, and 10%, respectively.*

*ROA = return on assets; ROE = return on equity; SSB-SCORE =* Shari'ah *supervision score, BSIZE = bank size, BAGE = bank age, GDP = gross domestic product, INFLATION = inflation rate. Model (1): Shows Eq. (1); Model (2): Shows Eq. (2). Stata software was used for analyzing hypothesis test based on System-GMM.*

#### **Table 5.**

correlation with BSIZE and BAGE (*p* = 0.01). Nomran and Haron [27] found similar correlations for SSB-SCORE with the BAGE and INFLATION and for INFLATION

To check the existence of the multicollinearity issue, variance inflation factor (VIF), as an indicator of multicollinearity, is used. Multicollinearity test in the data set is performed and no multicollinearity problem is found in the data, as the VIF of variables is less than 10 (refer **Table 5**). Based on this, there is no concern of

**Table 5** presents the regression results examining the study hypotheses based on the two-step system-GMM. Based on **Table 5**, the diagnostic tests show that the two models (1 & 2) are well fitted as AR(1) and AR(2) satisfy the conditions that there is first-order autocorrelation but no second-order, as suggested by the literature [32]. **Table 5** also depicts that the models (1 & 2) are well fitted with statistically significant test statistics for the Wald test, indicating that the instruments are valid in the GMM estimation for the measurements (ROA, ROE) (Model 1: *p* = 0.00,

Additionally, the Hansen *J*-statistic test does not reject the null hypothesis at any conventional level of significance for the two measurements (ROA, ROE) (Model 1: *p* = 0.59, 0.59; Model 2: *p* = 0.70, 0.35), indicating that all the models have valid instrumentation. Finally, in line with the rule of thumb [41], the number of instru-

As expected in the first hypothesis (H1), SSB score is reported to relate positively to performance as measured by ROA and ROE (Model 1: at *p* = 0.05, 0.01); thus, the first hypothesis is supported. This result is in support of literature such as Nomran and Haron [27] who found a positive impact for the SSB score on the performance

For the second hypothesis (H2), a positive relationship is found between the SSB score and performance in the presence of the financial crisis for all the measurements (ROA, ROE) (all at *p* = 0.05); the second hypothesis is, thus, supported but not at 1% level of significance. This result is consistent with the findings of [15], who found a positive and significant impact for SSB supervision on the IBs' performance during the financial crisis. The results indicate that SSBs slightly enhance IBs' performance during the financial crisis period. According to Mollah et al. [15], a possible justification for this positive effect is related to the SG structure of IBs that helps them undertake higher risks and decrease the effect of the crisis on their profitability. Ben Zeineb and Mensi [42] also found that the governance structure of IBs allows them to take higher risks to achieve a high efficiency level. Abedifar et al. [43] believe that components of IBs' governance systems may protect them from

The findings, therefore, suggest that an increase in SSB effectiveness increases IBs' performance even during the crisis periods. For this, the IBs, policymakers and practitioners should consider these findings when aiming to improve SG practices in the Islamic banking industry, which in turn may help in protecting IBs during crisis and non-crisis periods. They should give due importance to SSB characteristics (size, cross-membership, educational qualification, reputation and expertise) in

ments does not outnumber the number of groups in all the models.

multicollinearity among the set of explanatory variables.

with the BSIZE and BAGE.

**4.3 Diagnostic test**

*Banking and Finance*

**4.4 Hypotheses test**

0.00; Model 2: *p* = 0.00, 0.00).

of Southeast Asia IBs.

the problems faced by CBs.

**44**

*SSB and IBs' performance in the presence of the financial crisis: two-step system-GMM estimation.*

enhancing the performance of IBs. Regarding the appropriate SG structure, some empirical studies have been conducted in this context. Nomran and Haron [2] suggested that SSB size of IBs should neither be lesser than three nor greater than six. Further, Nomran and Haron [27] confirmed that IBs should balance the number of SSB scholars with experience in *Shari'ah*, as well as in law, accounting and finance. They also indicated that scholars with PhD in *Shari'ah* and law are more associated to enhance IBs' performance. Finally, they indicated that IBs should restrict the scholars' memberships across SSBs.
